The Road to Recovery: How and Why Economic Policy Must Change

8

The End of the Post-War Era

The recession that followed the financial crisis is not only the worst that we have suffered in the post-war era: it foreshadows the end to that era. Whereas in the past the US, with recently some help from Japan and the UK, has borne the main burden for keeping the world economy moving forward, that burden will now have to be more evenly shared. This will require a major change in the economic policies of China and Germany, among others, which unfortunately they appear unwilling to contemplate.

For the past 50 years or more the US has aimed to avoid recessions by using both fiscal and monetary policy and has used them too eagerly. Whenever it appeared that weakness in domestic demand was leading to falls in output and rises in unemployment and defaults on debts, the US administration and central bank would boost the economy by stimulatory policies. Until the financial crisis the results of this policy were beneficial in the short-term in so far as recessions were mild, but it caused two major long-term problems.

The willingness of Japan, the UK and the US (“the Keynesian trio”) to use fiscal stimulus has reduced the pressure on other countries to do the same and as the Keynesian trio cannot do more, it is essential that others learn that they must make a greater contribution to the success of the world economy than they have been prepared to do in the past. The other problem arose from the encouragement that the excessive eagerness to prevent even ...